Why cheap and cheerful makes good business sense

28 February, 2013

French state railway company SNCF is launching Ouigo, a ‘low-cost’ version of its high-speed TGV service, with fares from €10 for journeys between Paris, Lyon and Marseilles. Could we and should we expect the same on Britain’s high-speed network? Our answer is yes.

To explain why, we need to look at what the new French model entails.

SNCF has already pioneered low-cost offers on its domestic TGV trains, with low price deals and family areas available on a book-in-advance basis. What’s different is that the new ‘Ouigo’ service involves whole separate trains offered at discount prices – which although they start at €10, will on average sell at higher (although still attractive) prices. So why bother with a separate low cost train? After all, deep discounts are available on Inter City trains already in Britain; why not just continue with the same arrangements for HS2 trains when services start up?

Targeting car users

The new idea in France is to target those people who continue to use cars for long distance travel. Often, this is families, and when groups of people travel together, the economics of private car travel look relatively better against the rail alternative, with multiple tickets to purchase.

TGV services now have to pay more realistic charges for use of infrastructure (something of a catch up with the situation we have had in Britain since the creation of Railtrack, now Network Rail). With busy and expensive terminals in the city centres already well served with frequent TGV services, SNCF sees an opportunity to address the private car market and win even more market share for rail. This would have high-speed trains departing from suburban stations, closer to the target market, easier to access by car. So the new services will operate from Marne La Vallée station in Paris and Saint-Exupéry in Lyon, rather than the city centre stations used by the existing TGV services. The geographic separation of termini from those used by the more expensive, higher frequency TGV services reduces the risk to SNCF of existing customers ‘down-trading’ – although some will undoubtedly do so.

So, is HS2 set up to accommodate this type of offering?

Well, of course no decisions have been taken on the service plans at this stage. There is a likelihood that spare capacity in terms of train paths on HS2 will be quite limited or even non-existent at peak times. But then the Ouigo service avoids the busiest peak periods. We believe there is likely to be some spare track capacity during the day and in the evenings on HS2 where this kind of concept could be tried. Unlike in France in 2013, in Britain, where we have an established pattern of ‘open access’ rail operators, there is every reason to believe a competing operator could provide a low-cost operation. Doing so would spread the benefits of HS2 even wider, and add yet more to its business case.

To introduce a Ouigo–equivalent it would be necessary to operate to/from non-central stations. Services would – as in France – need to be operated just as fast as the ‘main’ high-speed service, and would still need to pay track fees – but not the high charges likely to be associated with using stations such as the new Euston.

Across the North, such services could operate from a whole range of places not on the HS2 network but connected to it. To address the car-driving markets of outer London and the wider south east suggests thinking of services that would use the planned connection between HS2 and HS1; this would allow low-cost services to run from Stratford in East London (which has good road access from the M11), and Ebbsfleet in Kent (just off the M2/M25).

But it should be remembered that the HS2 business case to date has assumed our high-speed services will attract no premium over regular long distance rail fares. While at the top end rail ticket prices are expensive, most people don’t travel first class/fully flexible. We have previously estimated the typical single fare (in today’s prices) at £40 – 45 based on an analysis of the price people actually pay for tickets for journeys such as Manchester — London.

The secret of success with HS2 will be ensuring that trains operate with few empty seats, and this can only be achieved by offering a range of prices to appeal to different market segments on the same trains. But there is no doubt that a low-cost high-speed model, targetted at providing a better alternative to the tedium and vagaries of the national motorway network, could have great appeal, and the HS2 plans can make this possible Ouigo–style too.